Sibling relationships have been dominating the news headlines in 2023. The high profile tale of two brothers at loggerheads over personal issues combined with differing views about how the family "firm" should operate and whether they can both continue working together. Unfortunately, this scenario is not uncommon and, while it can make for some uncomfortable silences during Sunday lunch, it can pose a bigger problem for parents who have to decide how to deal with their estates, and ultimately their interest within the firm, on death.
The obvious method for succession planning would be to have a comprehensive will prepared that details the testator's wishes clearly. This allows the testator to control how any business or agricultural property would be passed to subsequent generations and, where assets (and liquidity) allow, provides an opportunity to achieve a fair division of assets amongst siblings, reflecting the family's personal circumstances. The will can also take into account tax planning measures.
However, a further difficulty can arise in Scotland when considering the application of legal rights.
Understanding legal rights in Scotland
Legal rights are a form of forced heirship in Scotland. This means that a spouse and any children of a deceased person who dies domiciled in Scotland are automatically entitled to a proportion of the estate whether there is a will in place or not. An entitlement under the will cannot be claimed at the same time as claiming legal rights. Unless legal rights are discharged they exist for 20 years.
Legal rights are calculated from the deceased person's net moveable estate. Moveable estate is essentially everything in the estate apart from land and buildings, known as heritable property. The net value of the moveable estate is the value of the moveable assets less any debts and liabilities (for example, funeral expenses). Moveable assets would include any interest in a family business, such as shares or an interest in a partnership. The situation is further complicated where land and buildings are owned by the family business or partnership rather than by the individual. This is very common in farming when agricultural property is held by the family partnership, although the terms of the partnership agreement should always be reviewed for clarity. Broadly, unless a partnership agreement provides otherwise, land and buildings in a partnership will be treated as moveable property and, accordingly, form part of the legal rights calculation.
• Where a deceased person is survived by a spouse or children they can claim one half of the net moveable estate. That one half share is then divided amongst the children of the deceased. The share does not increase if another child decides not to claim.
• Where there is a spouse and children, a spouse can claim one third and the children can share in one third.
• The remaining estate falls to be dealt with in terms of the will or under the rules of intestacy in Scotland.
• Legal rights can be discharged during life or on death, as part of the administration of the estate.
Why do legal rights matter?
Quite simply a legal rights claim can frustrate the intentions of the testator. It may mean that the executors have to raise funds to meet the claim which can cause a huge disruption to the business or, in certain circumstances, means the business is no longer able to continue. A legal rights claim can also cause personal conflict for families at an already difficult time.
How can Brodies help?
The best way to deal with legal rights is to start having discussions with your family and trusted advisers now.
There are a number of practical ways to deal with legal rights planning during life, some more easily achieved than others. Where the family situation allows it may be possible to approach legal rights claimants and have them sign a legal rights discharge during the lifetime of the testator. This can provide certainty for all parties and ensure estate planning is able to be carried out as intended. It can also reduce the potential for family conflict as all parties are able to have their queries and concerns addressed.
Where the situation does not allow for resolution during life, then a strategic review of assets would identify where action could be taken, such as ensuring moveable estate is minimised, heritable property is held in the name of the individual or transferred to certain types of trust.
This type of planning requires expertise and empathy. Brodies are well placed to provide comprehensive succession planning advice tailored to meet the needs of every individual client.